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Update

Barrow Hanley Credit Partners July 2025 Monthly Update

In this post:

8.18.2025
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Executive Summary

  • The passage of One Big Beautiful Bill presents tailwinds to investment and taxes already surfacing in corporate commentary
  • Passive ETFs that focus on HY and Loans are notably poor performers versus their benchmark index
  • Private Credit defaults are closer to 6% including PIK interest, compared to Loans at less than 4%

July was a big month for the administration. The passage of the One Big Beautiful Bill (“OBBB”) was a big win for the administration. Capital expenditure and R&D expensing, other infrastructure investments, and lower tax rates could provide a decent boost to growth. Companies are already highlighting benefits and raising cap-ex plans in their earnings calls. Risks include how these investments are financed. The administration was also able to strike a handful of trade agreements which will increase tariff revenues earned by the government, which are more likely to serve as taxes to US consumers, but on the margin encourage domestic production, given that notably in the trade agreements there are commitments from the counterparty countries to invest a significant amount of capital into the US. According to Piper Sandler’s Macroeconomics team, the US consumer is paying 31% of the tariffs currently, with importers paying 58% and exporters covering 11%. With tariffs going higher on August 1st, we’ll have to see how this split potentially changes.

Within financial markets, performance was a little bit more benign than political accomplishments. Equity markets were positive, with the S&P up 2.76% and small caps up 1.76%. Meanwhile, in fixed income, returns were steadily positive but not quite as exciting. 10-year rates rose, with the passage of the OBBB causing 10-year bond returns to decline -0.67%. Investment-grade corporates returned +0.15% as spreads tightened. High Yield generated a +0.40% return and Loans were up +0.82%.

In conversations with clients and prospects, passive investment options are often discussed. We looked at how passive investment options compared with index returns for large asset categories. Surprisingly, small caps – represented by the Russell 2000 – and investment grade corporates were the most efficient. We defined efficiency as how close the ETF returns were versus the index since inception. Not surprising to us is how inefficient High Yield and Loans are in a passive investment format. In both asset classes, the largest ETF underperformed the index by well over 100bps annually.

High Yield

High Yield returned 0.40% for the month, just shy of coupon return as the average price declined 1/8th. Lower quality led in returns, with CCCs up 1.39%. Single-Bs were up 0.45% and BBs were up 0.17%. July was the busiest month since late 2021 with issuance of $37.5bn gross and $8bn net, bringing year-to- date issuance up to $183bn, with $135bn representing refinancings. Yields ended at 7.07%, which is 2bps higher than the start of the month, driven by higher Treasury rates and lower spreads. HY spreads compressed 15bps to 306bps. Demand was reasonable, with HY taking in $2bn of inflows and bringing year-to-date flows to $11.9bn.

Loans

Loans generated a solid 0.82% return, with Single-Bs significantly outperforming the rest of the market, up 0.86%. BBs were up 0.53% and CCCs were up 0.37%. The average loan price increased by $0.25 to $96.70 while the average coupon declined 2bps to end at 7.85%. Similar to HY, Loan issuance was very heavy with $202.4bn in gross issuance or

$14.2bn of issuance net of re-pricings. Year-to-date gross loan issuance has been $643bn, 82% of which has been re-pricing and refinancings. Loan yields increased slightly during the month. Loan demand has been strong, outpacing supply. Fund flows have seen $2.5bn in demand month-to-date and $4.7bn year-to-date, while CLOs have provided an additional $24bn in demand.

Private Credit

Lincoln International, an advisory provider for the private credit asset class, recently discussed a market update for distress, and it’s outpacing that of the High Yield and Broadly Syndicated Loan asset classes. Private credit is an opaque market, and the analysis is best done by advisors close to it who see a breadth of deals and their progression over time. The two best methods to

triangulate on a default rate are: 1) actual covenant default rates, which are different from payment defaults, and 2) the percentage of loans in the market that have paid their interest in additional principal versus cash interest (“PIK” for pay-in-kind), with some adjustments for borrower intent. Current data for covenant defaults show a 2.9% rate, which compares to the 4- year average of 3.2%. This only tells part of the picture, however. PIK features in Loans were either: 1) structured at the time of the original deal to permit flexibility for capital expenditure or other growth objectives, or 2) added at a later date to mitigate credit stress where borrowers were not able to pay the contractual cash interest due to lenders. The former was an expected feature and the latter was a direct result of credit stress and what would have been a payment default. 2021 was a strong year for private credit loan growth and ~7% of all loans had a PIK feature of any kind as of 4Q21. That compares to

~11% for 1Q25. However, ~35% of loans in 4Q21 were PIKing due to stress instead of being an initial feature of the loan, and today this figure sits at ~56%. That implies the default rate as a result of credit stress was 2% in 4Q21 and closer to 6% today. That compares with a 1.37% and 3.86% total default rate for HY and Loans, including distressed exchanges. For payment defaults alone, HY and Loans are only 0.40% and 1.19% respectively. We expect the divergence will continue whether due to economic weakness or elevated rates.

CLOs

CLOs helped pull the Loans market ahead of other fixed income products. CLOs saw $24bn of new issuance compared to the

$14.2bn of new loan issuance. Gross CLO issuance was $53.9bn, including reset and re-pricings. Year-to-date gross CLO issuance has been $299.3bn and $119.6bn net of re- pricings and re-sets. CLO AAA and AA saw marginal tightening during the month, while Single-As through BBs were roughly flat. This divergence is likely due to AAA ETFs continuing to see solid inflows: more than $2bn in July.

Source: Barrow Hanley. Returns represent an asset-weighted composite of all Bank Loan Fixed Income portfolios or High Yield Fixed Income portfolios. Index returns are shown before transaction costs, management fees, and other expenses. Performance is expressed in U.S. currency. Net-of-fee returns are calculated using a model fee. The model fee is based on a $100 million portfolio using our standard fee schedule. Past performance is not indicative of future results. Inception Date for Bank Loans is June 1, 2018. Inception Date for High Yield is January 1, 2005.
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ABOUT BARROW HANLEY GLOBAL INVESTORS

Barrow Hanley is a diversified investment management firm offering value-focused investment strategies spanning global equities and fixed income. Recognized as one of the few remaining firms dedicated exclusively to value investing, Barrow Hanley enjoys a boutique culture with a singular focus to assist clients in meeting their investment objectives. Today, Barrow  Hanley has approximately 100 employees, over half of which are investment professionals managing assets for our valued clients. Barrow Hanley stewards the capital of corporate, public, multi-employer pension plans, mutual funds, endowments and foundations, and sovereign wealth funds across North America, Europe, Asia, Australia and Africa. For further information, please visit www.barrowhanley.com.

General Disclosures:

All opinions included in this report constitute Barrow Hanley’s (BH) judgment as of the time of issuance of this report and are subject to change without notice. This report was prepared by Barrow Hanley with information it believes to be reliable. This report is for informational purposes only and is not intended to be an offer, solicitation, or recommendation with respect to the purchase or sale of any security, nor a recommendation of services supplied by any money management organization. Past performance is not indicative of future results. Barrow Hanley is a value-oriented investment manager, providing services to institutional clients.

Barrow Hanley Credit Partners® is a legally assumed name for the Alternative Credit investment team and investment strategies of Barrow Hanley Global Investors®, including Bank Loan Fixed Income, Collateralized Loan Obligations, and High Yield Fixed Income.

These investment summaries are provided for informational purposes only and should not be viewed as representative of all investments by the firm. This report includes certain “forward-looking statements” including, but not limited to, BH’s plans, projections, objectives, expectations, and intentions and other statements contained herein that are not historical facts as well as statements identified by words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “projects”, or words of similar meaning. Such statements and opinions contained are based on BH’s current beliefs or expectations and are subject to significant uncertainties and changes in circumstances, many beyond BH’s control. Actual results may differ materially from these expectations due to changes in global, political, economic, business, competitive, market, and regulatory factors. Additional information regarding the strategy is available upon request.

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Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

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Please contact us for more information.

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Barrow Hanley Global Investors
2200 Ross Avenue
31st Floor Dallas, TX 75201
www.barrowhanley.com

8.18.2025
Follow us:

July was a big month for the administration. The passage of the One Big Beautiful Bill (“OBBB”) was a big win for the administration. Capital expenditure and R&D expensing, other infrastructure investments, and lower tax rates could provide a decent boost to growth. Companies are already highlighting benefits and raising cap-ex plans in their earnings calls. Risks include how these investments are financed. The administration was also able to strike a handful of trade agreements which will increase tariff revenues earned by the government, which are more likely to serve as taxes to US consumers, but on the margin encourage domestic production, given that notably in the trade agreements there are commitments from the counterparty countries to invest a significant amount of capital into the US. According to Piper Sandler’s Macroeconomics team, the US consumer is paying 31% of the tariffs currently, with importers paying 58% and exporters covering 11%. With tariffs going higher on August 1st, we’ll have to see how this split potentially changes.

Within financial markets, performance was a little bit more benign than political accomplishments. Equity markets were positive, with the S&P up 2.76% and small caps up 1.76%. Meanwhile, in fixed income, returns were steadily positive but not quite as exciting. 10-year rates rose, with the passage of the OBBB causing 10-year bond returns to decline -0.67%. Investment-grade corporates returned +0.15% as spreads tightened. High Yield generated a +0.40% return and Loans were up +0.82%.

In conversations with clients and prospects, passive investment options are often discussed. We looked at how passive investment options compared with index returns for large asset categories. Surprisingly, small caps – represented by the Russell 2000 – and investment grade corporates were the most efficient. We defined efficiency as how close the ETF returns were versus the index since inception. Not surprising to us is how inefficient High Yield and Loans are in a passive investment format. In both asset classes, the largest ETF underperformed the index by well over 100bps annually.

High Yield

High Yield returned 0.40% for the month, just shy of coupon return as the average price declined 1/8th. Lower quality led in returns, with CCCs up 1.39%. Single-Bs were up 0.45% and BBs were up 0.17%. July was the busiest month since late 2021 with issuance of $37.5bn gross and $8bn net, bringing year-to- date issuance up to $183bn, with $135bn representing refinancings. Yields ended at 7.07%, which is 2bps higher than the start of the month, driven by higher Treasury rates and lower spreads. HY spreads compressed 15bps to 306bps. Demand was reasonable, with HY taking in $2bn of inflows and bringing year-to-date flows to $11.9bn.

Loans

Loans generated a solid 0.82% return, with Single-Bs significantly outperforming the rest of the market, up 0.86%. BBs were up 0.53% and CCCs were up 0.37%. The average loan price increased by $0.25 to $96.70 while the average coupon declined 2bps to end at 7.85%. Similar to HY, Loan issuance was very heavy with $202.4bn in gross issuance or

$14.2bn of issuance net of re-pricings. Year-to-date gross loan issuance has been $643bn, 82% of which has been re-pricing and refinancings. Loan yields increased slightly during the month. Loan demand has been strong, outpacing supply. Fund flows have seen $2.5bn in demand month-to-date and $4.7bn year-to-date, while CLOs have provided an additional $24bn in demand.

Private Credit

Lincoln International, an advisory provider for the private credit asset class, recently discussed a market update for distress, and it’s outpacing that of the High Yield and Broadly Syndicated Loan asset classes. Private credit is an opaque market, and the analysis is best done by advisors close to it who see a breadth of deals and their progression over time. The two best methods to

triangulate on a default rate are: 1) actual covenant default rates, which are different from payment defaults, and 2) the percentage of loans in the market that have paid their interest in additional principal versus cash interest (“PIK” for pay-in-kind), with some adjustments for borrower intent. Current data for covenant defaults show a 2.9% rate, which compares to the 4- year average of 3.2%. This only tells part of the picture, however. PIK features in Loans were either: 1) structured at the time of the original deal to permit flexibility for capital expenditure or other growth objectives, or 2) added at a later date to mitigate credit stress where borrowers were not able to pay the contractual cash interest due to lenders. The former was an expected feature and the latter was a direct result of credit stress and what would have been a payment default. 2021 was a strong year for private credit loan growth and ~7% of all loans had a PIK feature of any kind as of 4Q21. That compares to

~11% for 1Q25. However, ~35% of loans in 4Q21 were PIKing due to stress instead of being an initial feature of the loan, and today this figure sits at ~56%. That implies the default rate as a result of credit stress was 2% in 4Q21 and closer to 6% today. That compares with a 1.37% and 3.86% total default rate for HY and Loans, including distressed exchanges. For payment defaults alone, HY and Loans are only 0.40% and 1.19% respectively. We expect the divergence will continue whether due to economic weakness or elevated rates.

CLOs

CLOs helped pull the Loans market ahead of other fixed income products. CLOs saw $24bn of new issuance compared to the

$14.2bn of new loan issuance. Gross CLO issuance was $53.9bn, including reset and re-pricings. Year-to-date gross CLO issuance has been $299.3bn and $119.6bn net of re- pricings and re-sets. CLO AAA and AA saw marginal tightening during the month, while Single-As through BBs were roughly flat. This divergence is likely due to AAA ETFs continuing to see solid inflows: more than $2bn in July.

Source: Barrow Hanley. Returns represent an asset-weighted composite of all Bank Loan Fixed Income portfolios or High Yield Fixed Income portfolios. Index returns are shown before transaction costs, management fees, and other expenses. Performance is expressed in U.S. currency. Net-of-fee returns are calculated using a model fee. The model fee is based on a $100 million portfolio using our standard fee schedule. Past performance is not indicative of future results. Inception Date for Bank Loans is June 1, 2018. Inception Date for High Yield is January 1, 2005.
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